EU weakens carbon market: industry gets more free permits and longer to pollute

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BRUSSELS — The European Commission has confirmed it will allow EU industry to continue emitting planet-warming gases well into the 2040s and offer more free pollution permits for longer, as part of an overhaul of the bloc’s Emissions Trading System.

The Commission released the long-awaited revision on Friday after a full night of talks, following internal division over the details of the sweeping reforms to the EU’s most powerful tool for tackling climate change.

The final proposal represents a significant watering down of ambition, and is likely to spark a fight in Parliament and among member countries between those who want more concessions for industry, and those who want to accelerate the path to climate neutrality.

The speed at which companies under the ETS will be forced to reduce their emissions will be considerably slower than previously planned. That will be done by reducing the “linear reduction factor” (LRF) — the rate at which pollution caps fall annually, which was due to reach zero by 2039.

Under the Commission’s review, the LRF will be reduced from 4.4 percent to 3.7 percent between 2031 and 2035. After 2036, it will decrease at the even gentler rate of 1.7 percent annually. That will extend pollution well into the 2040s, and will likely be seen as a major rollback by the ETS’s staunchest defenders.

The Commission will also hand out free carbon allowances for several years longer, including to sectors covered by the carbon border tax, which will now receive them until 2038 — a move that could inspire challenges at the World Trade Organization.

For the first time, starting in 2036, the Commission will give industry the option of buying carbon credits from outside the EU to offset their emissions. That has the potential to lower the carbon price and give industries more options to pollute if EU carbon allowances run out. It will also introduce 250 million tons of domestic removal credits — representing carbon dioxide removed from the atmosphere — into the ETS to be auctioned between 2031 and 2040.

Taken together, these measures will likely be welcomed by industry, that claim the ETS in its current trajectory is unrealistic and costly. Whether pro-ETS groups in Parliament and member countries accept the looser rules is less certain.

EU climate chief Wopke Hoekstra said the review was a more “business-friendly” approach to carbon pricing, but insisted the EU had not abandoned climate goals.

“Rather it advances climate action, while transforming the ETS into a genuine engine for innovation and investment and re-industrializing Europe for the clean economy of the future,” Hoekstra said at a news conference following the release of the review.

He said the changes were “fully in line” with the EU’s climate goals.

To boost investment in decarbonization, the proposal requires “at least” 50 percent of all ETS revenue to be given back to ETS sector companies to pay for decarbonization measures. That could prove controversial with member countries, which have come to rely on the billions in revenue they receive from auctioning ETS permits.

So-called “front-runners” — industrial sites and companies who have led sectors in going green — are also being rewarded. The Commission will unlock free allocations to decarbonization through conditionalities: 80 percent of EU money will be given to companies after the company provides a decarbonization investment plan, while the remaining 20 percent will be provided after the investments are implemented. The top 10 percent of lowest polluters will not have to prove their green bonafides and will receive the allowances.

On aviation, the review will not fully extend the ETS to cover all outbound international flights, but will instead adopt a “tailored solution” and will bring “flights landing in countries within 5000 km into the ETS from 2029.” The move will strategically keep flights headed to China or the U.S. from incurring ETS costs, in an attempt to avoid a clash with the two major powers.

The Commission will also gradually extend the ETS to cover waste incineration from 2031.

This article has been updated.